Message to Distressed Student-Loan Debtors: Don't Give Up! Change is In the Wind

Don't give up
'cause you have friends
Don't give up
You're not the only one
Don't give up
No reason to be ashamed
Don't give up
You still have us
Don't give up now
We're proud of who you are
Don't give up
You know it's never been easy
Don't give up
'cause I believe there's a place
There's a place where we belong

Don't Give Up

Lyrics by Kate Bush & Peter Gabriel 

If you are overwhelmed by your student-loan debt, discouraged, and don't know where to turn, take my advice. Go to your refrigerator, pop the cap off a Shiner, and then listen to Don't Give Up, written by Peter Gabriel and Kate Bush. Several artists have sung the song, but I prefer Willie Nelson's version.

Some of the lyrics prompt me to reflect on the millions of Americans who are burdened by their unpayable student loans. "Don't give up," Willie tells us. "No reason to be ashamed." You still have your friends.

And I personally believe that change is in the wind regarding the federal student loan program. I think the magnitude of the student-loan disaster has grown so enormous that the federal government can't ignore it.  I see faint signs that help is on the way.

Why do I think this?

First, the Department of Education is finally moving forward on banning mandatory arbitration clauses in student-enrollment contracts at the for-profit colleges. If DOE follows through, students who were defrauded by their colleges can sue and can even join class actions. This is a good sign, and could mark the beginning of the end for the rapacious for-profit college industry. 

Second, Hillary essentially embraced Bernie Sanders's call for free college education at public universities this week (with some qualifications). This is also a good sign, because no scheme to offer free tuition is workable without massive reform of the federal student-loan program.

Third, and more importantly, Hillary called for a 3-month hiatus on student-loan payments while students refinance their loans to take advantage of lower interest rates. Once the federal government begins a wholesale effort to refinance millions of loans,  it will be apparent to everyone that the student-loan program is a train wreck. Broad relief could emerge from Hillary's idea.

Fourth, the bankruptcy courts are beginning to remember their purpose, which is to offer a fresh start to honest but unfortunate debtors. The recent cases are all over the place, with some courts still issuing callous decisions. But there are a lot of good decisions: Roth, Hedlund, Krieger, Abney, McDowell, Fern, etc.

Fifth, the Department of Education issued an important letter in July, 2015 outlining when it would not oppose bankruptcy discharge for student-loan debtors. DOE said creditors should consider the cost of opposing bankruptcy discharges, whether or not they think a debtor can show undue hardship if forced to repay student loans.

So far, this letter has been largely ignored. In my opinion, DOE did not act in harmony with the letter when it opposed bankruptcy discharge in the Abney case out of Missouri.  But DOE is now on record that it recognizes a variety of circumstances when a bankruptcy discharge is appropriate for some student loan debtors.

Richard Precht used that letter to his advantage in a Virginia bankruptcy decision earlier this year. He presented the letter to a very receptive Virginia bankruptcy judge, and DOE agreed not to oppose a discharge of Precht's debt. 

I acknowledge that all these signs of hope are faint and that a lot of misery lies ahead for millions of college borrowers who now hold about $1.5 trillion in student-loan debt.

But this catastrophe will someday come to an end--it can't go on forever. I recall my father, who was captured by the Japanese on the Bataan Peninsula during World War II ad endured the living hell of a Japanese prison camp from April 1942 until August 1945.

Two thirds of the men who were captured with my father did not survive the war. Some were murdered, some starved to death, and a few committed suicide. But my father survived, and the war ended.

Likewise, the federal student-loan program will eventually collapse, and millions of deserving college borrowers will get relief.  So, remember Willie's advice: Don't give up. 

And keep a six-pack of Shiner on hand  in your refrigerator. (My advice, not Willie's, but I'm sure he would agree.)

Don't give up: You've still got your friends

References

Stephanie Saul and Matt Flegenheimer. Hillary Clinton Embraces Ideas From Bernie Sanders's College Tuition Plan. New York Times, July 6, 2016. Accessible at http://www.nytimes.com/2016/07/07/us/politics/hillary-clinton-bernie-sanders-education.html?_r=0

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Hillary Clinton proposes a three-month moratorium on student-loan payments and massive loan refinancing: A good idea, but difficult to implement

According to the Washington Post, Hillary Clinton has proposed a three-month moratorium on student-loan payments to allow borrowers time to restructure their student loans at lower interest rates.

Let me say flat out that this is a good idea. As the press has widely reported, about 40 percent of college-loan borrowers who are in the repayment phase of their loans aren't making payments. These people are seeing their loan balances go up as interest accrues on unpaid debt, and they desperately need repayment options they can afford.

In addition, millions of people who are making their loan payments would benefit from repayment plans that would lower monthly payments and take advantage of lower interest rates.

Hillary's proposal underscores this stark fact: The federal student-loan program is in chaos. There are currently eight income-based repayment plans, and even experts are confused about how the different options work and which students are eligible for the various repayment plans. Giving students a three-month hiatus to sort all this out is an excellent idea.

But why is Hillary making this proposal now? Was she prompted by pure politics--making a play for young people's votes? Is her proposal an attempt to win over Bernie Sanders' supporters?

Obviously, Hillary's proposal was driven by political consideration. But I think there is something more going on--namely panic. I think Hillary and the Democratic establishment finally realize that millions of Americans are overwhelmed by unmanageable student-loan debt. These distressed debtors are frustrated, demoralized and angry; and they won't vote for Hillary unless they think she will provide them with tangible relief if she is elected President.

In short, the Democrats see blood in the water; they know they must do something substantive to keep young voters in the Democratic column in the November election.   And even Hillary's fiercest critics must admit that her massive student-loan refinancing proposal is substantive and significant.

Nevertheless, I don't see how Hillary's plan can be effectively implemented. The federal student loan program is like a massive battleship plunging across a raging ocean at full speed--it can't be turned around quickly.  Here are some of the problems:

First, simply determining who is eligible for Hillary's refinancing program will be a huge challenge. More than 40 million Americans have outstanding student loans, and most of them are in the repayment phase.  Just figuring out who is eligible to stop making loan payments and who is not will be an enormous headache.

For example, a lot of borrowers took out private student loans that aren't part of the federal student loan program.  Of course, private loans won't be covered by Hillary's moratorium. But research has shown that many borrowers don't know whether their loans are federal or private, and some have both kinds of loans. If Hillary implements a moratorium, a good many borrowers will stop making payments on their private loans, which will get them in trouble with their lenders.

And 5 million borrowers are already in income-based repayment plans under very favorable terms. Can these people stop making payments for three months? If not, who is going to notify them that they are not eligible to participate in the moratorium?

Second, the Department of Education may not have the capacity to meet the bureaucratic challenge of refinancing millions of loans over a three-month period. There are 43 million people with outstanding student loans, but many borrowers signed multiple promissory notes--perhaps a dozen or more. And some of these documents date back 20, 25, and even 30 years.  

Refinancing all these loans will be a gigantic undertaking, the bureaucratic equivalent of launching Obamacare. I seriously doubt whether DOE or the various creditors have the resources to refinance all these loans over a three-month period. After all, DOE has had great difficulty coping with Corinthian Colleges' former students who sought loan forgiveness in the wake of Corinthian's bankruptcy. 

Third, once college borrowers are given license to stop making payments for a brief period, it will be very difficult to get them back in the repayment mode. In some ways, Hillary's proposal is like the European Union's decision to accept refugees from the Middle East. Once the stream of migrants began moving, the Europeans found themselves unable to handle the volume of refugees that crossed into the EU. And there was no effective way to regulate the flow.

Likewise, Hillary's proposal to allow millions of college borrowers to stop making loan payments while they refinance their student loans will create a massive upheaval in the federal student loan program. If her plan goes forward, I think we will see millions of people stop making loan payments, whether or not they are eligible for Hillary's moratorium. 

Finally, Hillary's student-loan refinancing plan may be nothing more than a way to shove borrowers into 20- and 25-year repayment plans.  The Obama administration has been aggressively pushing college borrowers into long-term income-based repayment plans. It has said it hopes to have nearly 7 million people in IBRPs by the end of 2017.

Hillary's pan will accelerate the movement of student borrowers into long-term repayment plans.  If it is implemented, we will surely see 10 million people or more in IBRPs, which will effectively make them indentured servants to Uncle Sam, paying a percentage of their income to the government for a majority of their working lives just for the privilege of going to college.

As I have said repeatedly, IBRPs are a bad idea and nothing more than a way to keep a lid on the student-loan crisis. It would be very disappointing if Hillary implemented a student-loan refinancing plan that has the primary effect of lengthening the loan repayment period for millions of Americans.

Conclusion: In spite of its drawbacks, Hillary's loan refinancing proposal is a good idea. In spite of all the drawbacks to Hillary's refinancing idea, I hope she goes forward with it if she becomes President. Almost anything is better than the present state of affairs.  Lowering interest rates will give millions of borrowers some relief from their debt. And even if her plan forces more borrowers into IBRPs, that option is better than having them continue to shoulder monthly payments that are so large as to be unmanageable.

Besides, Hillary's scheme, if implemented, will expose the utter chaos of the federal student loan program, which the federal government has hidden from the American people. Once the public realizes how many millions of people are suffering from their participation in the federal student loan program, maybe we will see real reform--which is nothing more and nothing less than reasonable access to the bankruptcy courts. 

References

Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of  student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory

Josh Mitchell. More than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

Alia Wong. When Loan Forgiveness Isn't Enough. Atlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/